Chapter 8 - Intellectual property
8.1
In a global industry such as naval shipbuilding, capacity cannot be
considered on a country by country basis alone. Australia must access the
knowledge and technology of world leaders in order to keep pace with
technological developments and support its fleet. In this context, this chapter
discusses Australia's capacity and requirements in the area of intellectual
property (IP).
8.2
As noted elsewhere, Australia largely sources ship designs from overseas
and, except in niche areas, is reliant on overseas designed weapons and other
systems. With limited indigenous IP, the ability to negotiate and manage
contracts guaranteeing access to IP is essential for efficient and sustainable
naval shipbuilding.
Negotiating in a global market
8.3
Defence stated that it deals with intellectual property rights in a
'unique way':
Instead of seeking particular categories of intellectual
property, Defence contracts for broad groupings of rights often designated as
foreground, background and third party intellectual property. It does this
because it is often difficult to determine what intellectual property exists or
will exist, and the nature of that intellectual property.[1]
8.4
Defence explained that the task of 'intellectual property needs
identification' is undertaken in conjunction with other planning activities for
each acquisition. The needs identification phase forms the basis of Defence's
approach to negotiating intellectual property rights. Among other things, the
phase gives guidance as to which rights should be owned by Defence and which
rights licensed to Defence. Defence explained:
Whilst ownership of intellectual property will give Defence the
greatest flexibility, Defence may pay a high premium to own the intellectual
property. It may be more cost-effective to negotiate a broad licence over the
necessary intellectual property, if this will allow Defence to achieve its
operational or business goals. In some scenarios ownership of intellectual
property may be required, despite the added expense, for strategic or national
security reasons.[2]
8.5
The ability of Australian companies to gain access to necessary
intellectual property depends in part on inter-government relations. As ASC
mentioned in its submission:
In order to build sophisticated warships, a builder must secure
commercial and security rated access to a wide range of warship design,
technology, hardware and software systems. Some of this is available through
the negotiation of commercial partnerships and supply contracts but some can
only be acquired by having appropriate national security clearances and
government-to-government ‘fathering’ agreements, for example the United States/Australian
agreement for the AEGIS air warfare destroyer weapons system. Securing and
maintaining such access requires the successful negotiation of appropriate
agreements and the implementation and maintenance of many commercial and
security systems and practices.
Failure to achieve appropriate security clearances and
agreements with governments and other high technology systems providers, and
failure to build confidence that information acquired will be protected, leads
to denial of critical technologies and systems.[3]
8.6
In an assessment of defence industry generally, Professor Paul Dibb
touched on the complexities involved in securing such agreements:
This [increasing dependence on access to US technologies] will
require that we negotiate firmly with the US over its non-disclosure policies
and get access to the source codes that will enable us to modify or alter the
performance characteristics of US platforms, missiles and sensors. These are
highly sensitive issues, even for such a close ally of the US as Australia.[4]
8.7
Defence was generally satisfied with Australia's bargaining position,
noting that 'the degree of leverage Australia possesses in intellectual
property negotiations depends largely on the nature and value of the
procurement'.[5]
Defence observed that the Defence Materiel Organisation's (DMO) 2006–07 budget
of $8.7 billion equates to around 0.8 per cent of Australia's GDP, giving DMO
some leverage in negotiating contract terms with Australian companies. Further,
Defence noted that 'as the market amongst advanced industrialised countries for
defence industry is relatively small, Australia retains a reasonable degree of
leverage with international companies'.[6]
Of course, this assessment is based on DMO's entire budget, not naval
shipbuilding specific acquisitions and technologies.
8.8
In relation to U.S. technology, Defence acknowledged:
Some difficulties have arisen with US companies because of
restrictions on exporting US information, including associated intellectual
property, under the International Traffic in Arms Regulations. These
difficulties apply to all countries dealing with the US, not only Australia.[7]
8.9
Defence explained some of the mitigation strategies DMO uses to deal
with difficulties that arise with negotiating intellectual property rights.
These include buying commercial-off-the-shelf (COTS) and military-off-the-shelf
(MOTS) capabilities which generally have appropriate intellectual property
right attached to them.[8]
However, a key consideration for Defence's naval acquisition decisions is the
need for capabilities that meet Australia's specific operational requirements.
COTS and MOTS options are not always able to meet these requirements.
8.10
Another strategy used by DMO, where it has been unable to obtain
intellectual property or technical data from an equipment manufacturer, is to
use 'agreements with other countries to enable a transfer of the intellectual
property or technical data needed to meet a capability requirement'.[9]
Benefits of IP access
8.11
Contractual arrangements guaranteeing access to IP and design rights are
critical both to construction and to cost-effective through-life support.
Without ownership or access to IP, Australia is left dependent on system
providers' specifications, developments and upgrades. This limits Australia's
capacity to independently integrate, repair and upgrade systems and tailor them
to specific strategic requirements.
8.12
ASC Managing Director Mr Greg Tunny told the committee that access to IP
is important for efficient production:
What is most important is the access to the intellectual
property. If I have full and free access then I do not so much mind who owns
it. But if the ownership brings access restrictions then I may mind. Those
access restrictions, for example, may be my disclosure of that intellectual
property to the subcontractor of my choice. That may cause me to have to choose
another subcontractor or to do it myself when I would have preferred to give it
to a subcontractor or other issues like that.[10]
8.13
Defence reiterated throughout the inquiry that its focus for Australian
industry was ensuring that the sector has sufficient capacity to sustain,
maintain and upgrade the fleet.[11]
As such, Defence's discussion of IP focused on development and sustainment of defence
capability:
Defence must ensure that it owns or licenses rights to all
intellectual property that it requires to develop and sustain Defence
capability. Defence must ensure that it has access to all appropriate technical
data to enable it to exercise its intellectual property rights. As a minimum,
Defence must secure sufficient control of intellectual property to allow for
the use and support of the relevant Defence capability.[12]
8.14
Other submitters commented not only on Defence's operational needs, but also
the wider benefits of owning intellectual property, for example developing and
exploiting export opportunities. ASC stated:
Possessing...high-end design engineering skills provides scope for
owning a vessel’s functional and structural design intellectual property. This
major advantage provides the shipbuilder with the freedom to export any vessels
and designs without confronting crippling licence fees and other constraints
from foreign design owners. Export opportunities, in turn, have the potential
to generate further economies of scale.[13]
8.15
Mr Gaul, President of CEA Technologies, noted the importance of both
international partners and IP agreements in developing export activity:
I think those relationships [with larger overseas corporations]
are critical going forward. I really do believe it is something that can be
emulated in other strategic areas of Australian industry. To have a global
reach, you must have global partners, because we do not have a global company
in Australia, apart from BHP. Getting the right partners becomes an essential
element. It was a very deliberate process that we went through to get Northrop Grumman
on board. We first of all got two big brothers—the US government and the
Australian government—and we got IP agreements. So they were standing next to
us.[14]
8.16
Defence noted that it does facilitate access by Australian industry to
Defence intellectual property and assists industry to benefit from that access
'as appropriate'. Defence also 'facilitates
Australian industry access to third party intellectual property, with the goal
of developing a national defence capability, where this is consistent with
ownership and licensing rights'.[15]
Australian IP development
8.17
As discussed in Chapter 2, advances in technology and increasing costs
mean that few countries can produce sophisticated naval combat, sensor and
communication systems in their own right. A review of Defence industry by ACIL
Tasman commented on the need to strike a balance between access to overseas
technologies and investment in indigenous innovation:
Excessive reliance on overseas intellectual property and
innovation will lead to the 'dumbing down' of Australia's capability...thereby
reducing Australia's strategic and commercial options.[16]
8.18
Dr Richard Brabin-Smith considered that there are four broad criteria
for assessing whether to develop indigenous research and development. These
criteria are:
- where Australia has critical needs that are so different from
those of other nations that their products do not come sufficiently close to
what we require;
- where there are sensitive and compelling national security
considerations;
- where not even our closest allies are prepared to share sensitive
information or materiel with us; and
- where a new idea has emerged with potential benefits so
compelling that it would be folly not to take it further.[17]
8.19
In addition to the technology and design developed by Australian prime
companies and SMEs, the Defence Science and Technology Organisation (DSTO)
contributes to Australia's capacity for indigenous IP and innovation in support
of Australia's strategic defence requirements. DSTO has broad based industry
relationships and described its goals for industry interaction as:
(i) enhancing industry capability to support Defence, and (ii)
national wealth creation, whilst royalty income may be a by-product for DSTO.[18]
8.20
DSTO noted that although its primary focus is on developing Defence
capability, subsequent commercialisation has potential applications for both
defence and civilian operators. DSTO works with industry in a range of ways,
including:
-
industry alliances—focusing on areas of mutual interest,
innovation and developing pathways to commercialisation;
- the Capability and Technology Demonstrator Program—enabling
Australian industry to exhibit new technologies to Defence and explain
potential Defence applications;
- centre of expertise with universities—which provide a platform
for contract research in specific areas and enable universities to leverage
additional funding;
- collaborative relationships—enabling DSTO to broaden the
knowledge base on which it conducts its research; and
- assisting commercialisation—for example growing Australian
Defence industry through technology transfer and knowledge exchange with DSTO IP.[19]
8.21
Cutting edge naval technology has been developed in Australia with the
assistance of the DSTO. As noted in Chapters 4 and 5, the anechoic,
low-observable tiles developed for the Collins class submarines are recognised
as world class technology. Other examples include the Australian Minesweeping
System (AMAS), developed under a licence agreement by DSTO and ADI, and
carbon-fibre patching for ships' decks, developed by DSTO and transferred under
license to ADI.
8.22
As at July 2006, DSTO was managing 80 licenses. DSTO commented that:
Although only a small number of these 80 licenses provide any
significant royalty returns, substantial export revenues have been generated
through just 2 DSTO-based technologies (AMAS, and Advanced Sonar Systems). This
highlights DSTO’s philosophy of providing its intellectual property to industry
in order to enhance defence capability and national wealth creation, rather
than create revenue.[20]
8.23
The above examples demonstrate that while key components of Australia's
naval ships are sourced from overseas, the indigenous capacity for technology
development should not be overlooked.
Conclusion
8.24
Access to and control over IP is an element of naval shipbuilding where Australia's
capacity is vulnerable. As noted previously, Australia largely sources ship
designs from overseas and, except in niche areas, is reliant on overseas
designed weapons and other systems. In selected areas Australia's research and
development has produced cutting edge technology and generated important
indigenous IP. However, as a relatively small market Australia will inevitably need
to continue to access the technological advances made in the larger defence
markets of Europe and the U.S.
8.25
The ability to negotiate and manage contracts guaranteeing access to IP is
therefore vital to Australia's capacity for naval shipbuilding and repair.
Without control over IP, Australia is unable to maintain operational
sovereignty. Where IP is secured, there is potential for growth, development
and export. Australia's capacity in this area is therefore largely reliant on
the ability of DMO to negotiate contract outcomes effectively.
Part III
Productivity of the Australian shipbuilding and repair industry
Part II considered the capability of Australian primes to
meet Navy's future shipbuilding and repair demands, the adequacy of the network
of suppliers required to service the industry, the infrastructure needed to
support a naval shipbuilding industry in Australia and the available skill base
and workforce to sustain the industry. It found that in all four areas, Australia
has the capability or the potential to achieve that capability. Whether
Australian companies are internationally competitive in the construction and
through-life support of naval vessels is another matter.
Part III examines the comparative economic productivity of
the Australian shipbuilding industrial base and associated activity with other
shipbuilding nations. It then looks at the comparative economic costs of
maintaining, repairing and refitting large naval vessels throughout their
useful lives when constructed in Australia vice overseas. Finally, it considers
the broader economic development and associated benefits that accrue from
building, maintaining and upgrading naval ships in Australia including the
strategic arguments for, and advantages in, having a viable naval shipbuilding
and repair sector in Australia.
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